|Exports Of Non-tariffed Goods Soar (click to enlarge)
We must watch the action of China's government and what is happening to the Chinese currency in order to understand the impact China is about to exert on markets across the globe. As traders returned to work after China's Golden Week holiday they found the latest monetary easing by the People’s Bank of China (PBOC) provided little traction for the market. The PBOC has announced that reserve requirement ratios (RRRs) would be cut by 100 basis points. The injection of cash into the economy, which will be 750bn yuan ($109.2 billion), is an effort to offset the negative impact of higher US tariffs on Chinese exports. The PBOC is expected to cut this benchmark again before year-end amid ongoing stimulus efforts but the markets fell several percentage points anyway.
|More Debt Has Failed To Speed Up Growth
The fact that the PBOC is already scurrying about in an attempt to mitigate damage flowing from the hard talk being mouthed by the Trump administration is in some ways proof of China's vulnerabilities. While investors assess what continues to lie ahead on the trade front another issue we should not underestimate is that in recent months many of China's woes have been masked by the reality exporters have been loading boats in a rush to ship off extra goods prior to American tariffs going into effect which will subtract from future orders. This could slam demand through the floor going forward as these goods now sitting in inventory work their way through the system.
To those investors wishing to brush off the "China effect," the truth is it is affecting other markets and to think the markets that have suffered will suddenly reverse is a bit optimistic. Many emerging markets are highly dependent on selling raw materials to China and those most deeply in debt are feeling the pain of slowing growth. Those looking to Japan and sighting its equity markets as a beacon of hope may be disappointed to find the Japanese central bank has been a big buyer of stocks and responsible for much of their stock markets gains. This has made true price discovery difficult and such actions tends to contaminate markets across the globe when they feedback into other economies.
Two basic narratives exist about the escalating trade war with China and one is that China has outgrown its need for America and will simply replace it with other markets. Those talking about how trade wars will hit America harder than China and how Americans will capitulate at the first sign of pain ignore just how dependent China is on exports to America. Still, this view seems to be widely held in Beijing, where the US is seen as so politically divided that when the next recession comes political bickering will tear society apart. The other narrative is that China is on the verge of imploding and that it is a house of cards built on debt. While I tend to lean strongly towards the latter time most likely will be the decider of this debate.
Footnote; Private and state-owned Chinese firms act in the interest of the Chinese regime when it comes to foreign investments in the high-tech sectors. Below is the second part of a part-two series which explores why China is on a one-track path that blinds it to other options going forward and why this is a recipe for conflict.
http://China's Unflexible Path Forward.html